There’s no getting around it: Our economy is powered by data.
More than any time in history, we have the capacity to optimize our decisions through concentrated analysis and simulation. In many fields, we no longer have to guess at outcomes — but can, instead, predict with precision.
The groceries you buy at the store are now a product of a long progression of careful and meticulous decisions involving genetics, nutrition, weather, and pricing strategy. The product mix you find on the shelves reflects a complex stratum of algorithmic data and decision-making.
More broadly, retail is deeply steeped in data analysis, whether in brick-and-mortar locations or online. The companies that have thrived have learned to capture every important detail about your shopping preferences before you even visit their stores or land on their webpages.
These realities shape business operations everywhere. Why do companies value data? Their profitability hinges on it. Real-time business insights are a click away, and nimble businesses rely on them to compete in today’s market.
In an economy built on optimization and immediacy, data-centric companies are leading the pack. Early stage investors looking to increase their ROI should take note.
The 3 Levels of Data Integration
Before you can understand the value of investing in data-centric companies, it’s important to outline some distinctions. There is considerable debate about what it means to be data-centric versus data-driven. Just because a company uses some data doesn’t mean it’s data-centric.
It’s helpful to think in terms of the three levels of data integration. At the most basic level are the data-informed companies. These organizations use data to reveal problems or growth areas. Data is part of their operational playbooks. Employees know where to find it and how to use it to streamline operations, but they stop short of a deeper analysis.
At the next level are the data-driven companies, where data is used proactively to propel innovation. Data science is an important piece of operational decision-making, and it informs new products across different business lines. With recommender systems, for example, companies such as TikTok and Netflix gather information about your preferences and use it to shape your next decisions. Still, in many companies, this deeper data analysis has not yet infiltrated the central business strategy.
That’s where the next level of businesses operate. In data-centric companies, data is the business model. Data science is a core process, and that department runs parallel to every major line on the organizational chart. If a company is genuinely data-centric, data drives overarching strategy, not just individual decisions.
A data-centric company has a chief data officer overseeing an unambiguous operational plan. At the center of that plan is the data science team, bolstered by rules and guidelines for communicating its research results to leaders in the organization. These leaders are operationally empowered to put these results into practice.
Put another way, data-centric companies are transforming entire industries, while data-informed companies are being transformed.
Google is perhaps the most well-known example of this. As an early innovator in big data, its strategic approach catapulted it to the top of the heap of web search engines long ago, and it continues to propel the company to greater prominence. Its recent surge to overtake the bevy of online travel sites illustrates what can happen when a data-centric organization enters a predominantly data-driven industry.
On the one hand, these travel search websites transformed how we make our travel plans and have been doing so for a while now. But they can also create confusion. Which site has the best deals? Which is the most current? Enter Google — armed with big data and the reach needed to consolidate the entire travel search industry under one umbrella.
Since the launch of Google Travel, sites such as Expedia and Tripadvisor have sounded alarms about their rapidly plummeting sales. By becoming the industry’s central data hub, Google Travel now serves customers price confidence in a single place, where there used to be confusion in tracking multiple sources.
Google filling this void in the travel search industry by becoming its central data hub is not a singular case study. It can be best for an industry to have a single data-centric company where customers can source information. Many new entrants and startups in other sectors embody it, too, and this is why data-centric startups can grow at an accelerated rate. This is good news for investors who are willing to embrace some early stage risk.
Big Data, Big Risks
There’s much to be gained when you merge the worlds of big data and investing. But let’s be clear: Emerging technology is a risky market. That risk level multiplies the earlier you get involved from concept to launch.
Initially, there is immense risk in the conceptualization stage. If you’re investing this early on, nothing has been built yet. It’s all a matter of how well the startup founders can coalesce around the product vision. Can they create a prototype to solve a significant problem for their target customers? If this falls flat, as many concepts do, the game is up before it’s even started.
As the product advances through development, market testing, and eventually initial sales, corresponding risk levels are incrementally lowered. A lot of capital is needed to push through these stages, and the team is still very much testing its mettle against a capricious market. As the concept gains traction, you stand to win big, but you will weather many harrowing stages of risk.
At the final stage is the question of scalability. If the product is proving successful, then the company has to create the operational systems and processes to launch it en masse. If there is a clear path to scale, the ROI from having invested at the concept stage could be astronomical.
These chasms of risk are wide enough that you shouldn’t jump into early stage data investing with a cavalier attitude. There are ways to assess how well-positioned you are to handle the risk. Before you jump in, you need to ask yourself some key questions.
1. Are you ready to play the game? Just because you did well in youth leagues doesn’t mean you’re prepared to bat in the majors. If you want to invest in data-centric startups, you have to understand the competitive forces at play in each round of the game. Knowing these dynamics will make the goals for each stage clearer so that you have targets associated with each additional funding round.
2. How well do you know the technology? The realm of data-centric startups is thick with jargon and hazy with hype. Don’t trust the diligence of earlier investors to ensure the concept and product are the real deal. A lot of uncommonly wealthy people collectively sank at least $100 million into Theranos before it became clear the product was worthless. Know the product inside and out — and what it will take to fully realize its potential.
3. Have you thoroughly analyzed the competition? When it comes to data-centric startups, you want to be invested in the market leader because that’s where the real rewards are. Early on, it’s difficult to assess the competition or even know who might be operating in the shadows. But it’s crucial to research the competition as much as possible before someone else suddenly beats your investment company to market.
4. Can you create a diverse portfolio? In the fast-moving field of tech startups, there’s no way to win every bet. The graveyard of failure is much larger than the arena of success. If you really want to invest in data, you have to have enough capital to diversify. It’s the only way to manage your risk effectively.
Other essential questions to ask include:
Is the data in your startup mission-critical to its industry?
How easily could competitors access the same databases and cut you off in the race to market?
Is the industry faltering, or is it in transition, ready to be electrified by data-driven decisions?
In concert, all of these questions will clarify the risk involved and help you decide whether the investment is worth it.
The Rewards of Early Data Investing
When tech investments transform their industries, the magnitude of return can be staggering. If you’d purchased $1,000 in Microsoft shares during its initial public offering in 1986, it would have been worth $1.6 million by 2018.
This is mostly because Microsoft was driving a transition within its industry at the time. Every company was reinventing itself with computers at its center, and Microsoft was at the heart of it. It’s a classic example of generational opportunities in tech: A handful of leading startup companies drive an industry transformation — capturing other mature, established companies as customers and, thus, delivering the possibility of durable, outsize returns.
It’s deep tech’s capability to transform, reinvent, or even create new industries that make it such a powerful investment opportunity. It’s the opportunity behind data-centric tech — it can position companies for footing in an ever-shifting market.
This data-centric mindset is poised to permeate our economy in fields as diverse as energy, healthcare, education, and urban planning. And the change will be driven by high-growth, data-centric companies. This makes for an enormous opportunity for investors who play their cards right.
The biggest rewards, though, are for those who get involved early. By the time a company goes public, the biggest gains may have already been captured and new investors may be left with the scraps. It’s the difference between turning a few hundred dollars into millions and earning the modest 5% to 7% annual returns of the S&P 500.
So if you’re wondering how to increase your ROI, data-centric investing offers an answer. And if you don’t want to stay on the sidelines and watch while other investors win big, you have to get involved early.
But the stakes are high. Only 10% of professional, early stage fund managers reel in outsize returns. If you do choose to make the leap, be sure to ask yourself the essential questions above before you get involved. The risks are significant, and you should be well-informed and ready to adapt quickly to changes in the market.
The fact is that our economy is in a data-centric transition and investing is a potent opportunity. If you’re looking for the biggest opportunities out there, early stage investment in data-centric startups is a hard one to beat.
Seize Your ‘Moneyball’ Moment
Data is transforming the world around us. McKinsey & Co. suggests that data could open up between $3 trillion and $5 trillion in economic value per year across seven different sectors. This growth will continue, capturing an ever greater portion of the global economy.
Eventually, every company is going to be a big data company. Every industry is going to have its “Moneyball” moment. Every room will be a data room. Investing in this transformation is a once-in-a-generation opportunity for outsize growth.
As an expert in data-centric tech, Ascend Venture Capital is exceptionally positioned to back early stage companies that are powering this future state. For investors looking to capture outsize returns, Ascend can help them make targeted investments in a portfolio of data-centric companies that are positioned for durable competitive advantage in this transformation.
Are you looking to get involved in this hyper-growth sector? Learn more about how Ascend can help you. Download our whitepaper, “Why Data Is Driving You,” check out our GP’s TEDx Talk, or set up a meeting today.